Justin
SpittlerWe haven’t been completely honest with you.For the past few months, we’ve been saying Corporate America is in a profits “recession.” We even showed you proof.Just look at the chart below. You can clearly see that corporate profits stopped growing in 2014.So what’s the problem?

• It turns out, the situation is much worse than we thought...

The chart above uses earnings per share (EPS) for companies in the S&P 500.This metric divides a company’s net income by its total number of shares. It’s an easy way to measure a company’s profitability. But it’s not perfect.You see, this chart uses earnings for the past 12 months. It’s rearward-looking. It doesn’t show where profits are headed.The good news is that there are other ways to measure the health of a company. We’ll show you how in today’s Dispatch.By the end of this issue, you’ll know how to forecast corporate profits better than 99% of investors. You’ll also see why the corporate profits recession is actually much worse than it appears.

• Corporate profit margins peaked six years ago…

Corporate profit margins measure how much money a company keeps after it pays its employees, lenders, and Uncle Sam. Unlike EPS, profit margins are usually expressed as a percentage.The higher the profit margin, the better.You can see in the chart below that corporate profit margins hit an all-time high in 2011. They’ve been falling ever since.That’s not a good sign…

• Profit margins are cyclical…

They go through ups and downs. You can clearly see this in the chart above.Profit margins usually increase when the economy is growing. When the economy slows, they shrink.Right now, profit margins aren’t just shrinking...they’re in a clear downtrend. This tells us that they should keep falling.But that’s not the only reason investors should be nervous about corporate profits.

• Jeremy Grantham thinks profit margins always revert to their mean…

Grantham is one of the world’s most respected value investors. He’s the co-founder and chief investment strategist at Grantham, Mayo, Van Otterloo & Co., an investment firm that manages about $80 billion.In 2014, Grantham explained why it’s so important to watch profit margins:Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.If you’ve never heard of mean reversion, don’t worry. It’s simple. It basically means “what goes up, must come down,” and vice versa.

• If corporate profits keep falling, we could have big problems on our hands…

Below you’ll find the same chart we showed you earlier. The only difference is that we’ve shaded the periods where the U.S. was in an economic recession.You can see that corporate profit margins have fallen before almost every U.S. recession since the 1940s.But that’s not all.Right now, corporate profit margins are still well above their historical average. In order for them to revert to their mean, they would have to fall to 9%.You can see what happened the last time profit margins sunk that low. The U.S. economy entered its worst economic downturn since the Great Depression.

• To be clear, we aren’t saying profit margins will crash this quarter or even the next…

But history tells us they’re heading lower.It may take a year or longer, but a recession is coming.The good news is that we still have time to prepare. The easiest way to protect your wealth from a recession or financial crisis is to own gold.As we often point out, gold is real money. It’s preserved wealth for centuries. It’s survived every financial crisis known to man. You can’t say the same thing about paper money.This is why we encourage every investor to put 10% to 15% of their wealth in physical gold. Once you own enough gold for safety, you can think about speculating on gold for profit.

• Gold stocks are the best way to cash in on higher gold prices…

Gold stocks are leveraged to the price of gold.The problem is that most investors don’t know anything about gold miners. They analyze them like any other blue-chip stock. But gold miners aren’t like other companies.Many aren’t profitable. Some haven’t made their first sale yet. Others haven’t even found any gold.To make big money in gold stocks, you have to know what to look for.And Louis James does. Louis, as you may know, is our top gold analyst and a true industry insider. He understands the geology. He knows the smartest gold CEOs in the game. And he’s visited mines around the world.He recently got back from the richest gold deposit he’s ever seen. There, he saw gold veins as thick as his thigh. That’s unheard of.

Chart of the Day

One of Louis’ top gold stocks just doubled overnight.Today’s chart shows the performance of Aurion Resources (AU.V) since July. Louis recommended it in November. At the time, the stock was trading for C$0.35.On Wednesday, that stock surged all the way up to C$1.30. That’s 271% higher than when Louis recommended it. On Wednesday, Louis told his readers to take profits.If you made a huge profit on Aurion, we'd love to hear from you. If you missed the boat, don’t worry. Louis has several stocks in his portfolio that could soon deliver even bigger gains.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.